Backstory for next lumber deal could yield peace — touch wood

Harvey Enchin, Vancouver Sun10.01.2012

Ambassador Susan Schwab (second from left), United States Trade Representative, and David Emerson (second from right), minister of international trade, sign the softwood lumber agreement in Ottawa, September 12, 2006. They are flanked by David H. Wilkins, United States ambassador to Canada (left) and Maxime Bernier, minister of industry (right). Photo: Jean Levac, PNG files.Jean Levac
/ Jean Levac / The Ottawa Citizen

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What a difference a decade makes. If and when Canadian and American negotiators sit down, possibly about a year from now, to hammer out a new softwood lumber deal, they’ll be dealing with completely different circumstances than existed at the signing of the first agreement in 2006.

The recently announced two-year extension of the current Softwood Lumber Agreement, which was due to expire in October 2013, means a new agreement — assuming there will be one — won’t be in place before 2016, 10 years after the first deal was done. The reason for the lag is that following expiry of the agreement, there’s a 12-month standstill period of unencumbered trade in lumber in order to allow the market to recalibrate. After that, as the cliché goes, it’s a whole new ball game.

Recall that the background to the original agreement was a decade of rhetoric and litigation, culminating in a ruling by the U.S. Department of Commerce in 2001 that stumpage fees the Canadian government charged logging firms amounted to a subsidy because they were too low, and it imposed countervailing duties on Canadian lumber exports.

The recent history leading up to the new round of negotiations is far more tranquil under a legal framework that, by and large, has worked for both parties. The 2006 agreement, after all, settled more than 20 legal actions and returned $5 billion in duties to the Canadian industry. That alone would temper the tone of future talks, but changes in industry fundamentals and the economic landscape may influence them even more profoundly.

Canadian lumber producers have, historically, held a 34-per-cent share of the U.S. market, a source of irritation for the powerful U.S. Lumber Coalition, which contends to this day that Canada’s “subsidies” have harmed the U.S. lumber industry, threatened workers with unemployment and denied tree farmers a market for their crops.

Its latest allegation is that B.C. is exaggerating the damage from the mountain pine beetle in order to further reduce stumpage fees to the detriment of U.S. producers. Under the Softwood Lumber Agreement, these disputes — rather than being dragged through court — are transferred to the London Court of International Arbitration, where recent rulings have favoured Canada.

Although there’s little doubt U.S. agitators will continue to pursue these kinds of actions, the threat to U.S. producers from Canadian lumber exports is not what it was. The recession and U.S. housing crisis altered the dynamics of the market, as both lumber production and prices fell. Canada’s share of the U.S. market dropped to barely 25 per cent — exports of softwood lumber fell from $9.6 billion in 2004 to $2.6 billion in 2009. Many analysts now expect Canada’s average market share will not return to previous levels but rather hover around 27 per cent for years to come.

As Canada’s exports of softwood lumber to the U.S. declined, so too did Canada’s dependence on the U.S. market. In 2004, 81.1 per cent of Canada’s lumber exports were destined for the U.S; by 2010, the proportion was 58.7 per cent.

What happened is that Canada — and, for the most part, we’re talking about British Columbia, which accounts for nearly 60 per cent of Canada’s lumber exports — found a voracious new market in China.

Since 2003, B.C.’s softwood lumber exports to China have risen by 1,500 per cent; and the value of exports was up 60 per cent in 2011 alone, surpassing the $1-billion mark for the first time. Lumber sales to China have grown from $900 million in 2006 to $3.2 billion in 2011, representing growth in the share of exports from 6.6 per cent to 28.8 per cent.

John Allan, president of the B.C. Lumber Trade Council, explained that China is drawn by the attributes of wood — namely seismic performance, carbon sequestration and energy efficiency, adding that B.C. producers are unlikely to abandon the Chinese market no matter what happens south of the border.

“We learned a lesson in diversifying our markets to China and ignore that lesson at our peril,” he said. “We’ll need to keep an eye on the U.S. recovery and housing starts and that will dictate where negotiations go toward a new agreement.”

Another sea-change that will affect future negotiations is the warming relationship between Canadian and U.S. producers. They have found common cause in the promotion of wood and have joined forces to market it globally. The so-called checkoff system, developed over the last three years by the Binational Softwood Council (established by the Canadian and U.S. governments under the Softwood Lumber Agreement) and overseen by the U.S. Department of Agriculture, imposes a charge on all lumber producers to fund a marketing scheme to promote the use of wood. “We’re learning how to work together versus fighting over litigation,” Allan said.

The reduced threat from exports, more diversified markets and a new spirit of cooperation will change the tenor of negotiations and their outcome.

It may even come to pass that no treaty with restrictions, quotas, tariffs and taxes will be necessary. Perhaps the risks and rewards of free trade will finally be extended to lumber, not only giving Canada access to the U.S. market but spreading the benefits of building with wood to the rest of the world.

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